Why Banks Should Pass the Stress Tests: Goldman

By Avi Salzman

The Federal Reserve announced yesterday that it will submit the country’s biggest banks to stress tests to determine whether they can withstand an extreme economic downturn. Banks that test well will get more power to distribute capital to shareholders in the form of dividends and buybacks.

Goldman Sachs analysts conducted their own stress tests using the Fed’s worst-case scenario — 13% unemployment, a 21% decline in home prices and a 52% peak-to trough decline in the stock market — and they say that the banks came out looking squeaky clean.

“Despite simulating a more difficult stressed scenario than the prior year…we believe most banks are well positioned for the 2012 Fed stress test. Reduced leverage, higher quality assets (lower risk, limited/no prop trading) and higher capital levels relative to prior exams should help banks withstand the stress of the Fed’s exam,” wrote analyst Richard Ramsden.

“Given the high capital levels in the industry, we believe there is nearly $900 billion of loss absorption capacity. As such, all of our banks passed our test.”

Goldman thinks the following banks are best positioned to return capital in 2012: American Express (AXP), Wells Fargo (WFC), Discover Financial Services (DFS), State Street, (STT) and Northern Trust (NTRS).

The analysts also think the banks could benefit when the Fed makes the results known.

“As a bonus, disclosure of bank-by-bank results could serve as a catalyst.”

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There are 4 comments

NOVEMBER 23, 2011 5:22 P.M.

Robert Laughing wrote:

While AmEx and a few others MAY pass the test, it helps when the Fed, Timmy and the SEC are blind. These stress 'tests' have the same stellar 'validity' as High School competency tests....ALL RIGGED to serve some degenerate political scheme.

NOVEMBER 23, 2011 5:59 P.M.

ezduzit wrote:

let's see how great the bank's financial situation is when they stop borrowing money from the treasury for 'zero $' interest.

they will evaporate.

NOVEMBER 23, 2011 6:53 P.M.

pard wrote:

The FED doomsday scenario stress tests are absurd, no industry would pass, and the FED is over stepping their bounds. What right does the FED have to undermine confidence in the finest banking franchises in the world. What right does the FED have to cause tremendous harm to bank shareholder values. What right does the FED have to determine who can repurchase shares and pay dividends. What right does the FED have to pick winners and losers. FED stress tests unintended consequences destroys shareholder value, undermines confidence and forces the banks to hoard cash. The FED performed miserably going into the crash, the crash occurred on their watch and despite trillions of dollars stimulus the only thing that they have accomplished is higher shareholder values and a very weak recovery. Housing is still in a downward spiral despite record low mortgage rates. Job creation is anemic. Hoarding cash is at an all-time high, despite zero interest rates. Based on their track record, what right has the FED earned to punish bank shareholder values and savers with their irrational policies. Every time the market is ready to break out, they hammer the banks and the market breaks down. The market cannot go up on a sustainable basis without the financials and they are in the penalty box. I have a news flash for the FED, your job is to create jobs. Nobody creates jobs unless they have confidence. Banks do not make loans unless they have confidence. Banks will not make loans if they have to comply with your ridiculous doomsday stress tests. Indeed you will force them to hoard more cash. Take the handcuffs off the banks, let them unwind the dilution of shares that you forced them to issue to pay back TARP (at huge profits) that you forced them to take and buy back shares at deep discounts. Build back capital with PROFITS over time. Build confidence, shareholder value and unleash the potential of a robust American economy with a robust US Banking system as a backbone.

NOVEMBER 23, 2011 8:41 P.M.

What an Idiotic Stress Test wrote:

Under " 13% unemployment, a 21% decline in home prices and a 52% peak-to trough decline in the stock market —"

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